Arch reports growth in construction insurance business, increase in attritional large losses in reinsurance

Arch Capital Group Ltd. has reported a 2.2-point improvement in its Q3 insurance combined ratio and a 5.8-point deterioration in its reinsurance combined ratio, while Q3 gross written premiums increased 3.5% year over year.

Hamilton, Bermuda-based Arch released Wednesday its financial results for the three months ending Sept. 30.

Gross written premiums in the latest quarter were $1.158 billion, up 1.8% from $1.138 billion in the same period in 2014. All figures are in United States dollars.

The combined ratio was 89.7% in Q3 2015, up 1.2 points from 88.5% in 2014.

Arch writes specialty commercial insurance, as well as reinsurance, worldwide. It owns Toronto-based Arch Insurance Canada Ltd., which writes primary insurance and started operations in 2013. Arch Capital also writes treaty and facultative reinsurance in Canada.

In the primary insurance segment, Arch reported gross written premiums of $752.4 million in Q3 2015, up 3.5% from $726.7 million in 2014.

Underwriting income in the insurance segment was $21.5 million in the most recent quarter, up 29.1% from $16.65 million in Q3 2014.

An increase in Q3 net premiums written, in primary insurance, “reflected growth in construction, alternative markets and travel, accident and health business, partially offset by a reduction in program business,” Arch Capital stated. “The growth in construction business primarily reflected an increase in new projects and audit premiums, while the increase in alternative markets primarily resulted from changes in renewal dates on business acquired as part of the renewal rights agreement entered into in the 2014 second quarter.”

Product lines include casualty coverage for the construction industry, various lines of commercial liability, auto and inland marine, among others.

In the insurance segment, Arch reported its loss ratio was 65% in Q3 2015, down 0.1 points from 65.1% in Q3 2014. The combined ratio was 96% in Q3 2015, down 0.8 points from 96.8% in Q3 2014.

“The 2015 third quarter loss ratio reflected 1.6 points of current year catastrophic activity, compared to 0.4 points in the 2014 third quarter,” Arch stated. “Estimated net favorable development in prior year loss reserves, before related adjustments, reduced the loss ratio by 1.9 points in the 2015 third quarter, compared to 2.2 points in the 2014 third quarter. The estimated net favorable development in the 2015 third quarter primarily resulted from better than expected claims emergence in medium-tail and longer-tailed lines from older accident years. The balance of the change in the 2015 third quarter loss ratio primarily resulted from a lower level of attritional large loss activity relative to the 2014 third quarter and changes in the mix of business.”

The combined ratio, excluding catastrophic activity and prior year development, was 95.8% in Q3 2015, down 2.2 points from 98% in the same quarter last year.

As of Feb. 20, Arch Capital employed about 1,240 in its insurance segment, the firm said last February in its annual report.

In the reinsurance segment – which had about 250 employees as of Feb. 20 – gross premiums written were $329.3 million in Q3 2015, down 4.7% from $345.7 million in Q3 2014.

A decrease in net premiums written “reflected decreases in other specialty and property lines,” Arch said of its reinsurance segment. “The decrease in other specialty reflected non-renewals and share decreases in response to current market conditions, primarily in proportional motor contracts. The lower level of property business reflected share decreases and timing of renewals. Net premiums earned in the 2015 third quarter were 12.2% lower than in the 2014 third quarter, and primarily reflect changes in net premiums written over the previous five quarters, including the mix and type of business written.”

In addition to property catastrophe, Arch also reinsures third-party liability, workers compensation, excess and umbrella liability and marine and aviation.

Arch’s loss ratio in reinsurance was 44.5% in Q3 2015, up 2.8 points from 41.7% in Q3 2014.

The combined ratio was 80.1% in the latest quarter, up 5.8 points from 74.3% in Q3 2014. Excluding catastrophe activity and prior year development, the combined ratio was 94.6% in Q3 2015, up 4 points from 90.6% in Q3 2014.

“The 2015 third quarter loss ratio reflected 4.2 points of current year catastrophic activity, compared to 4.6 points of catastrophic activity in the 2014 third quarter,” Arch said of its reinsurance segment. “Estimated net favorable development in prior year loss reserves, before related adjustments, reduced the loss ratio by 19.2 points in the 2015 third quarter, compared to 20.6 points in the 2014 third quarter. The estimated net favorable development in the 2015 third quarter primarily resulted from better than expected claims emergence in short-tail business from more recent underwriting years and in longer-tail business across earlier underwriting years. The balance of the change in the 2015 third quarter loss ratio primarily resulted from a higher level of attritional large loss activity and changes in mix of business.”

Arch Capital also owns Arch Underwriting at Lloyd’s Ltd. (the managing agent of Arch Syndicate 2012), 11% of Watford Holdings Ltd. (which owns a Bermuda reinsurer), and a mortgage insurer in the U.S.